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Michael Parkinson’s caring voiceover makes these plans seem simple. Yet for many, Axa Sun Life’s over 50s plan is a seriously bad bet. You pay in more than it’ll ever pay out. Last week on BBC1’s Watchdog, I laid out my concerns in a film. I’ve since been swamped with questions, including: "I’ve got it, should I cancel?" So let me run you through this.
The sell is simple. Let me break down the key concepts for you:
- We pay you a fixed lump sum on death.
- No need for a medical.
- Perfect for funeral planning.
This all sounds an easy way to protect loved ones when you go, and many have bought into the idea. Over two million of these schemes are now in place. The most important bit, though, is in the small print. Let me blow it up for you:
"Premiums are payable for life and you could pay more in, than is paid out on death."
In other words, sign up for these types of policy and you may pay more IN than it ever pays out. That’s because, with over-50s plans, the amount it pays out is fixed. If you live longer, you keep paying in and in and in and in – and the amount paid out doesn’t increase.
Watch my Watchdog film on this
To get an easy introduction to the problems with these plans, view this Watchdog film. It doesn’t, however, include the follow-on studio interview where I explain the circumstances where these plans do work. This is covered below.
It’s easy to calculate whether you’re likely to end up with a bad deal. I’ll start with a simple example:
Big Bob is a 65-year-old darts player in pretty decent health. His kids are struggling and he’s alone, so he decides to put a bit of cash aside each month in an over-50s plan, paying £5 a month with Axa. It promises to pay him out a guaranteed £660 when he dies provided he lives at least two years.
To find out if it’s worth it…
Find out how long it’ll be before he pays in more than it’ll pay out
Divide the payout by the monthly contribution:
£660 divided by £5 = 132.
This gives the number of months after which he will have paid in an amount equal to his lump sum.
132 months divided by 12 = 11 years.
So, as Bob is currently 65, if he reaches the age of 76, he will have contributed more than the planned payout.
Consider the chances of living that long
So what are the chances of that happening? Well, to find the averages you can use the ONS mortality stats. Looking at your own health situation and the longevity of other members of your family is a good guide to try and work out an estimate (though of course, there is never an accurate answer).
The mortality stats show the average life expectancy for a man who has reached age 65 is 83.
Therefore the AVERAGE 65-year-old man will pay in more than they ever get out.
Worse still, if Bob just put his £5 a month in a top savings account with interest (after tax) he’d likely have built up the £660 after around 9 and a half years, so he’d be just 74 by the time he’d saved what Axa pays out.
I’ve put a few more Axa examples below – which show varying contributions and situations, showing how much it changes. So always do your own bespoke calculation.
|Woman aged 60|
|Contribution||Promised lump sum||Age at which contributions equal lump sum||Avg life expectancy of woman aged 60 (1)||Savings equivalent (2)|
|Man age 65|
|Contribution||Promised lump sum||Age at which contributions equal lump sum||Avg life expectancy of man aged 66||Savings equivalent (2)|
|(1) ONS mortality stats are for women aged 65 to live until aged 85, so I’ve estimated it at 84 for women aged 60 (2) Amount that would’ve built up in an untaxed top interest savings account by the age when contributions equal the lump sum had the money been put in there.|
But it doesn’t stop there, there are more points you need to be aware of…
- Once you have paid the money in, like an insurance policy, you can’t get it back
- Miss even one payment and you lose everything, no matter how long you have been paying in.
- You don’t generally get a payout if you die within a year of starting the plan (some policies, including Axa, also don’t pay out the full amount if you die within two years).
- Payments must normally continue way beyond the value of your lump sum, though many plans let you stop at 90. However, three companies – including, yet again, the market leader with nearly 800,000 policies sold – keep you going beyond that.
So our 65-year-old darts player Bob, who’d paid off the equivalent of his lump sum by the age of 76, would need to keep paying and paying – even if he hit 180.
In combination, this can put some who live a long time in a difficult position. Watchdog viewer Mary Vickers, aged 84, had two Axa Sun Life policies with a combined total plan payout of £2,740. She had already paid in £3,700, and needs to keep on contributing £22 a month until she dies.
She would’ve had far more had the cash just gone in a savings account.
As the lump sum is fixed at the outset, while it may sound a lot when you start, it’s worth is constantly being eroded by inflation.
Due to this, over the years, Axa has written to customers encouraging them to sign up for MORE plans.
Another Watchdog viewer, June Tapping, was distressed to discover her parents took out their first plan in 1987, but as its value dwindled, they decided to top it up with a second. Axa Sun Life encouraged them to do the same thing, leaving them with 10 plans, having paid in over £10,500 even though all the lump sums add up to less than £7,000.
There are some winners
Having been all doom and gloom so far, it’s worth noting that not every single over-50s plan is a nightmare for all who get them.
Others providers can have much better payout ratios
Some of the smaller companies can have much better payouts compared with what you put in. A few even link the lump sum to inflation.
If you want one of these, it’s worth doing the sums and comparing. The key sell is peace of mind that whenever you go there will be a lump sum – so if that’s at a decent price it isn’t too bad a decision. Also, the more you’re putting in, the better value products tend to be.
As there are no medicals, you can play the averages
My analysis is based on a statistically average person. But of course, at the age of 60 or 65 some people do have health issues, whether from being heavy smokers, seriously obese or already-diagnosed conditions and illnesses.
For someone in that position, these can be a very good gamble, as unlike other types of policy there is no medical. Though it’s important to note that if you were to die during the first one or two years (which varies by policy) you would not get a payout.
Take the example of a 65-year-old man who’s been told he’s only likely to live for another five years. On that basis, even an Axa plan for £74 a month would pay out £12,085 – if you did die after five years you’d only have paid in £4,400 to get it, a very efficient investment.
So for someone who’s very unlikely to make the average life expectancy, these can be a seriously good gamble. Though of course, do compare different plans to see which gives you the greatest return.
Having spent most of this blog heavily knocking these policies, the obvious question for the two million people who’ve got them already, if they’re in good health, is: "should I cancel?" Snce my film, many have tweeted me exactly such a question.
While it’s easy to say most people shouldn’t get them in the first place, that doesn’t mean those who have them should cancel. Do that, and everything you’ve already put in would be lost.
Sadly, as you are trapped in these policies, to work out whether to carry on, you effectively must discount everything paid so far. That money is lost, one way or the other. The big question to ask yourself is…
Take Beatrice. She’s 60 and has just got a £5-a-month Axa plan, paying out £1,065 when she dies. Certainly, on average, this isn’t a good deal as she has a life expectancy of 84. If she saved £5 a month every year till then she’d have £1,440 even before interest.
Now, let’s fast forward 15 years. Beatrice is 75, and has just read this guide. She’s panicked by finding out she didn’t make the best decision over this policy – and is considering ditching it.
The most important thing for her to understand, difficult as it is, is that the £900 already paid in is irrelevant. Even if she cancels now, that money is lost. The real question must dispassionately be whether it’s worth carrying on putting money in, or putting the money into savings instead.
Assuming she’s in good health, her life expectancy at this point is now likely to be roughly 86 or 87 (estimated). So is it worth paying £5 a month for the rest of her life to get the £1,065 payout for her family?
If she lived until 86, she would be paying in a further £660 by the time she died, yet as the payout is £1,065 that’s worth doing. In fact, unless she lives beyond the age of 92, she’ll still pay less in than she’d get back (ignoring inflation).
So, even though overall the policy isn’t worth it at the outset, on average Beatrice would be making a mistake to cancel at this point. Of course, working this out, and estimating lifespans, is difficult. So if forced to simplify it I’d say…
I wouldn’t want to discourage anyone from saving for their funeral planning (or providing money for loved ones when they go), yet if over-50s plans aren’t right for you, there are alternatives.
For many in good health, the simple alternative is putting money away in top savings, or even better, tax-free cash ISA savings. Yet this isn’t without its risks either. If you were too die sooner than expected, not enough may have been put in to pay for a funeral or other plans you have for the money.
Standard life insurance policies usually sold to families become very expensive the older you are, especially when you’re over 60. They’ll also take your medical history into account, so they can become prohibitive (though non-smokers in their 50s may still find them a good deal).
There are also simple funeral plans which guarantee to cover the cost of a funeral. This isn’t something we’ve covered on MSE yet, though this is a useful Which? piece on the subject.